Cashing Out Retirement Accounts

If you’ve been putting money away into a retirement account for a few years, it can be tempting to dip into those funds. However, withdrawing from your 401(k) or IRA early usually means penalties. The penalties can be significant: Forbes reported that Americans paid an estimated $5.8 billion in penalties on retirement account withdrawals on their 2010 tax returns.

It’s ultimately your decision: but you should know what you’re paying before making it. Mindy McIntosh talks with FOX 66 Profitt Report about the consequences of withdrawing money early from your 401(k) or IRA.

There’s an immediate cost to cashing out a 401(k) and that is federal and state income taxes. People younger than 59½ often get hit with a 10% early withdrawal penalty. There are a few exceptions to that rule for IRAs: You can withdraw your contributions from a Roth IRA at any time without penalty or taxes. A Roth IRA will waive the early withdrawal penalties on the earnings for qualified higher education expenses, as well as for first-time homebuyers.

A traditional IRA will also waive that early withdrawal penalty for those same reasons. There are also long-term consequences that include missing out on the opportunity for your savings to grow. If you cash out, you’re losing out on the compounding interest you would have built up.